External risks impede China recovery, more easing seen

BEIJING – China's burgeoning economic recovery may need central bank easing to spur it along next year, as foreign investors scale back spending commitments in the face of a gloomy external outlook that clouds prospects for the world's biggest exporter.

The People's Bank of China's (PBOC) fourth quarter survey of economic expectations, published on Tuesday, saw a jump in the number of bankers anticipating monetary easing in Q1 2013, even as recent hard data shows a mild rebound taking hold in Q4.

Weakness in the external environment - to which the world's second biggest economy is levered - remains a drag, according to the Ministry of Commerce, which on Tuesday revealed data showing foreign direct investment extended its longest run of year-on-year falls in three years.

"Next year, there are still many uncertainties for external demand and the prospect of a slowly growing global economy will last for a while," ministry spokesman, Shen Danyang, said.

"In addition, there is also increasing trade protectionism emerging. So we cannot be optimistic about the external trade environment next year," Shen told a scheduled news conference.

China is on course to end 2012 with the slowest full year of growth since 1999 and while the 7.7 percent rate forecast in a benchmark Reuters poll is way above the world's other major economies, it is far below the roughly 10 percent annual growth seen for most of the last 30 years.

Private sector economists, such as ING's head of Asian economic research Tim Condon, believe Beijing will act to drive the economy forward in 2013 as new leaders at the top of the ruling Communist Party get a firmer grip on the policy reins.

The government so far has relied on fine-tuning policy settings in its efforts to combat the worst downturn China has faced since the 2008-09 global financial crisis, studiously avoiding any hint of repeating the 4 trillion yuan ($640 billion) stimulus package it launched back then.

China cut interest rates in both June and July and has lowered banks' reserve requirement ratio (RRR) by 150 basis points since late 2011, freeing an estimated 1.2 trillion yuan ($193 billion) for lending.

Many analysts believe room for further interest rate cuts is limited as inflation and property prices start to pick up. Any easing is thought likely to be directed through money market operations that inject liquidity into the financial system.

POLICY EASING PROPECTS

The PBOC survey showed a rising proportion of Chinese commercial bankers it questioned are joining those outside the system who anticipate more policy easing in Q1 2013.

Some 19.8 percent of survey respondents said they expected easier policy during the first three months of next year, up sharply from 5.9 percent who had expected easing in Q4 2012.

The vast majority of survey respondents - 75 percent - said current policy setting were appropriate.

The survey's findings also detected a rise in inflation expectations and particular concern about the risk of a rebound in home prices.

It found 29 percent of respondents expect home prices to rise in the first quarter of 2013, 11.3 percentage points higher than the earlier survey result, with 66.6 percent saying home prices were unacceptably high.

Data on Tuesday showed Chinese home prices displaying fresh signs of recovery taking hold in November, the fourth month in the last five to show a rise as a two-year long government campaign to curb prices frays.

Real estate, which directly impacts around 40 other business sectors in China, has been a key concern for government policies aimed at reining in property speculation which has pushed prices well beyond the reach of many middle-class Chinese and sowed social discontent.

"The risk of tightening property curbs is accumulating due to rising home prices along with a reviving economy and stabilizing investment," said Zhao Xinkui, a property analyst with Huarong Securities in Beijing.

That leaves the policy backdrop finely balanced and the government likely hoping that enough momentum has been generated by its cautious easing so far to sustain a recovery.

DOMESTIC DEMAND MOMENTUM

Engendering an upswing in domestic demand could be as important to near term economic prospects as to the longer term rebalancing Beijing desires.

"There are increasing signs showing the domestic economy is stabilizing, which is the most important factor driving retail sales next year," the Commerce Ministry's Shen said.

"Meanwhile, the government also pledged to raise personal income and increase fiscal spending to improve education, healthcare and social security systems. All these measures will provide more scope of growth for retail sales in 2013," he said.

China's retail sales grew 14.9 percent year-on-year in November, ahead of the 14.6 percent forecast in a Reuters poll, and has been one of the most consistent indicators of the year.

The PBOC survey detected a rise in business confidence, a reading of 60.4 percent up 1.2 percentage points from the previous survey.

But its export order index dipped 0.4 percentage point on the previous quarter to 47.1 percent and the index of corporate expectations on export orders slipped to 47.9 percent from 49.5 percent in Q3.

Those findings reflect concerns about the external sector expressed at the Commerce Ministry's news conference and which November trade data, published last week, showed to be well-placed.

China's exports growth in November slowed sharply to 2.9 percent, much lower than the 9.0 percent expected and far behind October's 11.6 percent pace, underscoring the global headwinds dragging on an economy showing otherwise signs of a pick-up in domestic activity.

Foreign direct investment inflows have been crucial to job creation in China for years. Its 3.6 percent fall to $100 billion in the first 11 months of 2012 from a year earlier extends the longest run of year-on-year falls in three years as global economic headwinds crimp corporate spending plans.

Inflows have held steady above $8 billion for each of the last four months now, a signal that long-term investors are attuned to the prospects for a mild recovery.

But the rate of fixed investment remains below the record level hit in 2011 when China drew $116 billion in FDI and is likely to fall shy of the $120 billion the Commerce Ministry aims to attract in each of the four years from 2012 to 2015.